Why india need to abolish all kind of indirect taxes?

Albert Einstein once quoted “The Hardest Thing in the World to Understand is Income Taxes”.  True, but in india our lawmakers chose to adding complexity to this process by introducing a new kind of tax each and every year.

There are two kind of taxes in india, direct and indirect.

Direct taxes are income tax and corporate tax, which are collected based on your income. The rates of these taxes are different also. For example if a person earns more than 10 lakhs a year, the rate of tax is 30% for income above 10 lakhs, but if it earns more than 5 lakhs and less than 10 lakhs, the slab is subjected to 20% rate and if he earns less than 2 lakhs per year, he need not pay any income tax.

Indirect taxes are a burden on everyone. Now if a beggar is buying a  shampoo  or a person earning more than 1 crore per month is buying the same shampoo  from Durga general store, the shop owner will never ask his bank balance and will charge him extra, the price will be same in both cases. If the price of the shampoo is Rs.10, both have paid Rs. 2 or 3 as indirect taxes which were levied during course of manufacturing, selling, distribution (import may be) etc. of this product. Wherever these taxes have been collected,  the last bearer of this will be consumer only, whether he is  poor or rich.

Direct taxes are levied more from rich as he have to shell out 30% of income above Rs. 10 lakhs. Indirect taxes are collected from everyone equally whether he avail any service or buy any product.

Direct collection of taxes don’t lead to price rice, while indirect taxes leads to price rise.

Now let us see a rough estimate how much government gets at the end.
In fiscal year 2008-09 india collected :-

Total direct taxes – Rs. 3,33,818 Crore, Roughly say 3.5 lac crore.  (58%)

Total indirect taxes  –  Rs. 2,64,565 crore, Roughly say 2.5  lac crore. (42%)

Breaking up direct taxes further in pie chart below –
Direct tax collection percentage india

Now we can see that 63% of the direct taxes collected are paid by 1 percent of income tax payers in the country that is 1 lakh crore. Add another 2 lac crore to it from corporate taxes and you will get total direct tax collected as 3 lac crore paid by rich and corporates in the country.

Now what will happen if india abolishes all form of indirect taxes and go ahead only with income tax,corporate tax  and wealth tax (direct taxes only). It will have to increase its highest tax rate from 30% to 60% which will give an extra burden of 30% on rich and corporates. The result will be 6 lac crore in revenue collected from direct taxes only . Looks unrealistic, but when France being a developed country can go ahead with 75% rate why can india being a developing economy with one of the highest number of billionaires in the world can  get ahead with this.

The result will be astounding. Being no indirect taxes the prices will fall down, as a result more money will be there to shell out for 99% of the population. More consumption and a boost in economy will follow. These are just few advantages to count for. Imagine doing business without hassles of sales tax, VAT, service tax. More simplicity will make business more convenient for small firm owners and startups. I personally have heard from many friends that complexity in doing business discourages them from taking a plunge. Also many of the indirect taxes collected from the consumer are duped and not accounted by the business owners, as a result they go as black money. These things will stop.

Please comment and inform me if i am acting like another baba ramdev.



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